Law Offices of Nicholas Gebelt

Are Student Loans Dischargeable In A Bankruptcy?

Generally, student loans are not dischargeable in a bankruptcy. However, the Bankruptcy Code’s wording is a bit unclear. It provides that a student loan debt is nondischargeable “…unless excepting such debt from discharge … would impose an undue hardship on the debtor and the debtor’s dependents …”

Usually, nondischargeability actions are initiated by creditors, who ask the Court to determine that the debt will not be discharged. In the case of student loans, it is the debtor who initiates the lawsuit to get the Court to determine that the debt will be discharged. If the debtor does not initiate such an adversary proceeding to get a determination of dischargeability, then the debt will not be discharged.

Of course, the debtor has to win the adversary proceeding. Otherwise the debt will not be discharged. It is very hard to prove undue hardship. Moreover, if you are a good candidate to get a student loan discharge, it is probably because you are in a Chapter 7 bankruptcy. If you are in a Chapter 7 bankruptcy, you probably don’t have the funds to hire an attorney. As a consequence, most of the case law in student loan dischargeability actions involves unrepresented debtors who were outgunned by the counsel of the student lender.

Courts use a three-part test, called the Brunner test, that was developed in the New York case, In re Brunner. In the first prong of the test the debtor must show that making the payments makes it impossible to maintain a minimal standard of living. In the second prong the debtor must show that the difficulty will persist over the entire repayment period. In the third prong the debtor must show that the debtor has already made a good faith attempt at paying the debt.

A debtor who is unemployed will probably be able to satisfy the first prong. And a debtor who has made some payments will probably satisfy the third prong.

The second prong is the biggest hurdle because it requires the debtor to show what will happen over many years. Unless the debtor is now unemployable due to a permanent disability, it will be very hard to meet the second prong’s requirements.

There is talk in Congress of making student loans dischargeable in bankruptcy. For now, however, that is just talk. At one time in American history, they were dischargeable in bankruptcy. You had to have been making payments on them for five years before you could get them discharged. Then, it was seven years, and then in 2005, the rug was pulled out from under borrowers, and you couldn’t get rid of them unless you had an undue hardship. There have been cases where there was a partial discharge of student debt, but that is on a case-by-case basis.

Who Can File A Dischargeability Action?

Any creditor of a debtor can file a nondischargeability action. However, some aren’t going to.

For example, if the debtor owes child support or alimony, the recipient of that payment is not going to file a nondischargeability action because that type of debt is never dischargeable in bankruptcy.

A taxing authority is not going to file a nondischargeability action in bankruptcy because unless you satisfy the three-year, two-year, and 240-day requirement for dischargeability, the debt is not going to be discharged in a bankruptcy.

On the other hand, creditors sometimes file nondischargeability actions based on assertions of either fraud, breach of fiduciary duty, or willful and malicious harm to a person or property because the dischargeability of such debts is highly fact-specific. A complaint will sometimes have a combination of those three.

The debtor can also file a dischargeability action. The two most commonly filed are to: (a) determine that a student debt is dischargeable, rather than nondischargeable, and (b) determine that a particular tax debt is dischargeable.

The tax dischargeability action sometimes arises when the debtor believed the tax debt satisfied the requirements for dischargeability, but after the Court closed the case, the taxing authority asserts that the debt is still owed. The debtor may need to go back to the Bankruptcy Court and have the judge enter a determination that the tax debt is, in fact, discharged.

In theory, anyone who is owed money can file a nondischargeability action, and the debtor can file dischargeability actions. A trustee can also file a nondischargeability action or a motion to have the case dismissed with a bar to refiling.

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Attorney Nicholas Gebelt

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